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Today we are going to look at Sunningdale Tech Ltd (SGX:BHQ) to see whether it might be an attractive investment prospect. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Sunningdale Tech:
0.048 = S$21m ÷ (S$721m – S$289m) (Based on the trailing twelve months to March 2019.)
Therefore, Sunningdale Tech has an ROCE of 4.8%.
Does Sunningdale Tech Have A Good ROCE?
One way to assess ROCE is to compare similar companies. We can see Sunningdale Tech’s ROCE is meaningfully below the Machinery industry average of 8.0%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Sunningdale Tech compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.3% available in government bonds. It is likely that there are more attractive prospects out there.
Sunningdale Tech’s current ROCE of 4.8% is lower than its ROCE in the past, which was 8.1%, 3 years ago. So investors might consider if it has had issues recently.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Sunningdale Tech’s Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
Sunningdale Tech has total liabilities of S$289m and total assets of S$721m. As a result, its current liabilities are equal to approximately 40% of its total assets. With a medium level of current liabilities boosting the ROCE a little, Sunningdale Tech’s low ROCE is unappealing.
Our Take On Sunningdale Tech’s ROCE
So researching other companies may be a better use of your time. Of course, you might also be able to find a better stock than Sunningdale Tech. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.